January 6, 2010

China Casts Its Shadow on Mongolia

ULAANBAATAR, Mongolia—China’s unstoppable economic growth and its implications for the world inspire both optimism and fear. In the U.S. and Europe, many businesses see a vast and growing market, even as their workers face China’s low production costs and increasingly sophisticated technical capabilities.

But in the remote, windswept streets of Ulaanbaatar, the capital of a country with a strategic importance to China, the promise and the threat loom especially large these days.

In Mongolia, China’s role as the catalyst for interest in this desert land’s untapped mineral and energy resources has fueled optimism. Chinese demand for coal, copper and other Mongolian resources means anyone investing in the businesses that excavate them has a guaranteed market right next door.

But some in this traditional land of conquerors fear the China it once ruled may now swallow the tiny Mongolian economy.

“In my opinion, it’s not a question of whether Mongolia will get money or not, but of the very existence of Mongolia as an independent country,” says Gombosuren Arslan, who leads a Mongolian political group called the Just Society Front. He wonders: “will Mongolia become a colony of China?”

China is already Mongolia’s biggest foreign investor, and new funds are pouring in. In recent months, China’s sovereign-wealth fund, China Investment Corp., has agreed to invest $1.2 billion in mining companies with Mongolian assets. That sum is about a quarter of Mongolia’s gross domestic product, but less than half a percent of CIC’s total assets of $300 billion.

2:40In an interview for the Wall Street Journal, Mongolian Prime Minister Batbold Sukhbaatar spoke with Hong Kong Bureau Chief Peter Stein about the country’s relations with China and the U.S.

China’s financial clout unnerves politicians who grew up in an era when Russia was Mongolia’s uncontested international ally. “In my generation, more than 50% of engineers were educated in Russia,” says a member of Mongolia’s parliament involved in foreign relations. “We know Russian technology. It’s easier to understand their culture.”

Mongolia’s leadership is, by necessity, adept at maintaining an equilibrium between the two powers that surround this country of 2.6 million people.

In an interview last week, Mongolia’s new prime minister, Batbold Sukhbaatar, said he welcomed Chinese investment, but he was also careful to promote “balanced interest and balanced investment” from a number of countries. The translation: we’d like some other investors in here too, thank you.

One person close to the prime minister said that is one reason Mongolia is eager to see Peabody Energy Corp. of St. Louis play a role in the development of Mongolia’s next big resource project, the Tavan Tolgoi coal mine. Peabody is one of a number of parties interested in the project; China’s Shenhua Group in another interested party, a person close to the talks has said.

Despite its enormous financial influence, China has kept its profile in Mongolia relatively low-key. It has built up a presence in the mining sector not by acquiring mining assets directly, but through investments in companies with those assets, such as Canadian-listed coal miner SouthGobi Energy Resources Ltd. and Western Prospector Group Ltd., a Canadian uranium exploration company.

Arshad Sayed, World Bank country manager in Ulaanbaatar, sees an admirable restraint in China’s behavior toward Mongolia. “It’s very different than Africa, where China is very brazen,” he says—that is, much more willing to throw its weight around and not afraid to be seen doing it.

Perhaps China is motivated by concern over its international reputation, Mr. Sayed suggests. Or maybe it is an understanding that economics and geography are already in the country’s favor. Pushing too hard could prompt an anti-China backlash that might lead Mongolia to seek closer ties with Russia.

There does seem to be a certain inevitability to China’s rising influence over Mongolia, especially as the older Russian-educated elite are replaced by a generation with a different perspective. My 20-year-old translator says she studied Russian in school when she was young but lost interest when she got older. Now, she says as she plays a favorite Mandarin pop song on her cellphone, she’d rather learn Chinese.